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Insurance for Futures Trades?

Insurance against losses for U.S. futures customers may be feasible, according to a study commissioned after MF Global Holdings Ltd. and Peregrine Financial Group Inc. collapsed.

The study, commissioned by CME Group Inc., the Futures Industry Association, the Institute for Financial Markets, and the National Futures Association, surveyed private insurance companies to gauge their interest in providing protection to customers if their futures broker goes bankrupt, according to a statement released today.

A group of eight insurers expressed interest in forming a consortium to provide coverage. When a futures firm fails, as much as $300 million in customer funds would be protected under the insurers’ proposal, with the first $50 million of losses funded in part by brokers.

The industry is attempting to restore confidence after customer money went missing in two of the futures market’s biggest failures ever. When MF Global collapsed in 2011, it said $1.6 billion had disappeared. Russell Wasendorf Sr., the founder and chief executive officer of Peregrine, was sentenced to 50 years in prison in January after being convicted of stealing more than $215 million from clients of his brokerage.

Customers of MF Global are poised to get back all the money they lost when the firm failed, the brokerage’s bankruptcy trustee said this month.

The industry insurance study isn’t a policy recommendation, according to Christopher Culp, a consultant at Compass Lexecon who led the team that conducted the analysis.

“The objective of the study was to analyze and quantify the potential costs of various scenarios, including a government-mandated solution similar to what exists today in the securities industry as well as voluntary market-based solutions provided by private insurance companies,” Culp said in the statement.

The study also examined whether a government-mandated program, like the Securities Investor Protection Corp. in the securities market, would work as an alternative to relying on insurance companies.

Such a program—which would protect $250,000 of investments for all futures users—would require a government backstop until it amassed a $2.5 billion fund. That would take about 55 years, assuming futures brokers were charged a 0.5 percent tax on their annual gross revenue, the study concluded.

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